Typically, inexpensive items such as newspapers or candy bars are paid for in cash, since the costs of other payment systems, such as checks or credit cards, are too high for such small transactions. Electronic commerce is expected to lead to a dramatic growth in even smaller transactions, in some cases, transactions for less than a penny, such as purchases of individual news stories.
Most of the conventional electronic payment systems are inadequate for handling "micropayments" because of either computational or communications burdens. Therefore, a number of electronic micropayment systems have recently been developed (a list of references included in the Section 1, below provides citations to various conventional systems). While these systems do not provide all of the features of conventional electronic payment schemes, they are more efficient and provide adequate features for the small sums involved in micropayments.
The main problem for issuers of digital money is preventing "double spending" of legitimate digital currency. Although it is possible to verify who created a particular document, a basic problem with all electronic payment systems is that bits are easy to copy.
One class of electronic payment systems rely on tamper-resistant devices which prevent double spending by keeping users from duplicating those devices or from modifying the software in them. The disadvantage of these systems is that they require special hardware, and if the chips are reverse-engineered, the issuers could face a disastrous loss.
A second class of systems, on-line software-only electronic payment systems, can be secure if they are "fully" on-line such that the issuer participates in each transaction (such as in the iKP or NetCheque systems). However, these systems are typically unacceptable in micropayment situations, since the computational and communication requirements that they impose are excessive when a purchase costs only a fraction of a penny.
A third class of systems, off-line digital certificate systems, applicable to micropayment schemes, have been proposed to reduce the computational and communication requirements described above (e.g., NetCard, PayTree, PayWord, etc.). In each of these systems however, in order to make purchases from vendors, a customer must receive a digital certificate from a bank or some other financial intermediary. Each of these systems therefore either expose the issuer of the certificate to large losses, or, limit the users flexibility. The issuer is exposed to losses when the user spends up to a total limit assigned to that user at each of, for example, 10,000 vendors. While such losses can be prevented if the customer is required to obtain a separate certificate for each vendor she intends to deal with, these certificates must then sum up to no more than the customer's bank account balance. Similarly, the system may prevent overspending by "freezing" in the customer's account the maximal amount that the customer can spend with a given vendor. However, both of these solutions would be unacceptably restrictive when a customer wants to deal with any of thousands of online vendors and can not know beforehand how much she might spend with each vendor.
Accordingly, it is submitted that each of the above-outlined conventional approaches of tamper-resistant devices, fully on-line payment systems and off-line digital certificate systems is inadequate in low-priced transactions via electronic commerce.